Question

Please list and explain the 4 key supply side growth factors we discussed, and discuss the viability (do-ability) of each in terms of getting our economy growing again, given that today our economy is not growing.

a. The slides should provide you with what you need here.

b. The issue of viability – if the economy is growing slowly or not at all, do we have any chance of achieving success with each of the 4 growth factors? What will likely cause us problems? What approaches could we use to increase our odds of success? You need to think carefully on this one.

Answer 1

A)

1. Lower Inflation

Shifting AS to the right will cause a lower price level. By making the economy more efficient supply side policies will help reduce cost push inflation.

2. Lower Unemployment

Supply side policies can help reduce structural, frictional and real wage unemployment and therefore help reduce the natural rate of unemployment.

3. Improved economic growth

Supply side policies will increase the sustainable rate of economic growth by increasing AS.

4. Improved trade and Balance of Payments

By making firms more productive and competitive they will be able to export more. This is important in light of the increased competition from S.E. Asia.

B)

1. Privatisation

This involves selling state owned assets to the private sector. It is argued that the private sector is more efficient in running business because they have a profit motive to reduce costs and develop better services.

2. Deregulation

This involves reducing barriers to entry in order to make the market more competitive. For example BT used to be a Monopoly but now telecommunications is quite competitive. Competition tends to lead to lower prices and better quality of goods / service.

3. Reducing Income Taxes.

It is argued that lower taxes (income and corporation) increase the incentives for people to work harder, leading to more output.
However this is not necessarily true, lower taxes do not always increase work incentives (e.g. if income effect outweighs substitution effect)

4. Increased education and training

Better education can improve labour productivity and increase AS.
Often there is under-provision of education in a free market, leading to market failure. Therefore the govt may need to subsidise suitable education and training schemes.
However govt intervention will cost money, requiring higher taxes, It will take time to have effect and govt may subsidise the wrong types of training

5. Reducing the power of Trades Unions

This should

a) increase efficiency of firms e.g. less time lost to strikes
b) reduce unemployment ( if labour markets are competitive)

6. Reducing State Welfare Benefits

This may encourage unemployed to take jobs.

7. Providing better information about jobs

This may also help reduce frictional unemployment

8. Deregulate financial markets

To allow more competition and lower borrowing costs for consumers and firms.

9. Lower Tariff barriers

This will increase trade

10. Removing unnecessary red tape and bureaucracy

Which add to a firms costs

11. Improving Transport and infrastructure

Due to market failure this is likely to need govt intervention to improve transport and reduce congestion. This will help reduce firms costs.

12 Deregulate Labour Markets

This is said to be an important objective for the EU to increase competitiveness. E.g. Make it easier to hire and fire workers.